Irrational energy consumers?

Studies after studies conclude that energy efficiency is the least expensive way to "produce" the next increment of energy. Payback periods are reported to be a few years or less, begging the question of why isn't more energy efficiency happening?

As a matter of logic, there are three possible answers: The analyses are wrong, people are irrational or both. Not surprisingly, those who favor energy efficiency think that people are irrational.

Before pursuing the irrational argument, let's review some limitations of the analyses that folks commonly conduct. Typically these studies are engineering based. They assume perfect installation, use, and maintenance of the energy efficiency measure. They generally do not account for behavioral changes due to the measure, budget constraints of consumers, and transaction costs.

For example, once I have a more efficient air conditioner installed, I can keep my house at a cooler temperature than before but at the same cost. If the study assumes that I do not change the temperature setting of my unit, then it has overestimated - mis-over estimated as the President might say - the energy savings.

Moreover, consumers and businesses face budget constraints. Even if energy efficiency is cost effective, I may have higher payback opportunities that I pursue first. At some point, I run out of budget before I implement to the energy efficiency measures.

Finally, and in my mind a big issue, are transaction costs. It takes time, and therefore money, to figure out whether an energy efficiency measure is worth it and if so, which of the many options one should use. Consumers and businesses are weary of promises made by vendors, especially because they have little experience or knowledge to assess whether vendors are accurate in their claims.

These three reasons - overstatement by studies, budget constraints, and transaction costs - may seem like nitpicking, but in many cases may add up to consumers not installing energy efficiency measures for perfectly rational reasons.

Another point that needs to be discussed is what is meant by the statement that consumers are irrational. Obviously, there are degrees of irrationality, and no one is perfectly rational. Consumers may not be perfectly rational on average, and certainly there are those that stray far from this standard. But it is a big step from saying that folks are not perfectly rational to mandating that they install energy efficiency measures, go to the dentist twice a year, or whatever.

Don't get me wrong. Energy efficiency is underutilized and for the most part cost-effective. It must be a part of a comprehensive approach to reducing greenhouse gases and other air emissions and mitigate raising energy costs. But the way to justify energy efficiency, in my min, is not through the irrationality-of-consumers argument but due to the negative externalities that are not accounted for in today's energy prices.